[Their Own League, Regional Banks]③ Kings in Their Regions... Poor Mutual Oversight Among Regional Banks

290 trillion won. This is the total assets held by six regional banks nationwide (Busan, Daegu, Gyeongnam, Gwangju, Jeonbuk, Jeju) as of the end of the first half of this year. Although the assets of individual banks are not comparable to other banks, when combined, these six banks represent a massive scale second only to the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) and IBK Industrial Bank (about 450 trillion won).

Many experts point to 'organizational culture' as one of the fundamental reasons why these growing regional banks are shaken by major financial accidents. Their unique 'in-group favoritism' and 'older brother-younger brother' culture have significantly influenced their growth as regionally embedded banks, but on the other hand, there are criticisms that this has led to a culture of leniency in relation to various financial accidents.

Inseparable ‘In-group Favoritism’... Did It Invite Leniency?

According to disclosures made by each bank on the Financial Supervisory Service's electronic disclosure system on the 21st, the number of main business area branches (branches and sub-branches) of the six regional banks nationwide totaled 673. This accounts for 84.2% of their total branches. The main business areas refer to Busan for Busan Bank, Daegu and Gyeongbuk for Daegu Bank, Gyeongnam and Ulsan for Gyeongnam Bank, Gwangju and Jeonnam for Gwangju Bank, Jeonbuk for Jeonbuk Bank, and Jeju for Jeju Bank.

Accordingly, each regional bank holds considerable influence in its affiliated region. For example, Busan Bank, the largest regional bank, accounted for 34.5% of total deposits and 27.7% of total loans in the Busan area as of the end of last year. Gwangju Bank also recorded 27.4% and 18.6% respectively in deposits and loans in the Gwangju and Jeonnam regions. Roughly 20-30% of the total deposits and loans in a region are occupied by a single bank.

A local financial sector official said, “Regional banks monopolize various city, provincial, and district treasuries, and the strong local sentiment of residents gives them an advantage in deposits compared to commercial banks. Also, since government and local government policy funds prioritize them, their loan competitiveness is comparable to commercial banks,” adding, “In each region, the combined market share of the five major banks is only enough to catch up.”

A local commercial bank official said, “Commercial banks at best have branch managers meeting clients, but regional banks have their headquarters here (in the region), so the president and vice president directly engage in sales,” adding, “This is a very effective sales strategy and actually impacts performance.”

Within this structure, some interpret that the regional banks’ unique ‘in-group favoritism,’ represented by the ‘older brother-younger brother’ culture, weakens internal checks and balances among employees. While in terms of relational and regionally embedded finance, and organizational harmony and unity, in-group favoritism has its advantages, its side effects are not insignificant.

For example, in lending business, there are cases where internal relationships or relationships with business owners have a more direct impact than various corporate financial indicators, according to industry insiders. The recent illegal account opening incident can also be interpreted in this context.

A financial sector official working in a certain region said, “Compared to central banks, regional banks still have a strong ‘older brother-younger brother’ culture. For instance, if a matter requires headquarters approval, the junior staff might plead, ‘Please help me, hyung-nim (older brother),’ creating such an atmosphere,” adding, “Because of this, even when the borrower is in a very difficult situation on paper, the regional bank continues the transaction. This is because loan officers and clients are entangled like older and younger brothers.”

There are also criticisms that since the business networks are built around the affiliated regions where each regional bank is located and employees are recruited locally, internal checks and balances among employees are lacking. Looking at the profiles of regional bank CEOs, the influence of in-group favoritism remains strong. This tendency is even stronger when the CEO is an internal hire rather than an outsider. For example, among the five internal CEOs of Busan Bank, only one did not attend major local schools (Busan National University, Dong-A University, Busan Commercial High School, Gyeongnam Commercial High School). At Gyeongnam Bank, three out of four internal CEOs attended Masan Commercial High School or Gyeongnam University. At Daegu Bank, conflicts between school networks represented by Kyungbuk High School and Daegu Commercial High School were intense until recently.

BNK Busan Bank Headquarters (left) and DGB Daegu Bank Headquarters

The official said, “The illegal account opening incident at Daegu Bank is something that might have happened at commercial banks about ten years ago,” adding, “At commercial banks, new employees recently refuse to follow branch managers’ orders if they contradict training or regulations, saying ‘This is against the rules.’ But at regional banks, because the patronage culture still exists, there is a mentality of ‘No one will do anything to me’ or ‘Someone will solve it.’”

Of course, recently, the influence of school networks represented by local commercial high schools is diminishing. This is due to the ongoing regional economic downturn, the growing status of regional banks within the region, and the overall increase in university enrollment rates bringing in graduates from various universities. Nevertheless, the industry views that local sentiment and lenient mindsets still exert considerable influence within the region.

An official from the supervisory authority said, “Commercial banks do not have perfect internal controls either, but there is a culture of mutual monitoring and checks among employees. For example, if a colleague suddenly buys a luxury car or a high-end house, others become suspicious and report it,” adding, “In regional banks, employees are closely connected through local ties and school networks, so there are indeed shortcomings in strengthening internal controls.”

King in the Region... No Rival to Learn From

Since they were established under the motto ‘one bank per province,’ a downside is that there are no strong rivals within their affiliated regions to influence each other. In the central region, where there is no ‘eternal number one bank,’ various banks including the five major banks compete with each other and sometimes learn from financial accidents at other banks. However, in the regions, apart from the affiliated regional banks, only branches of other banks are present, so meaningful exchanges have not been maintained.

An official from the authorities said, “In the central area where banks are concentrated, when a financial accident occurs at one bank, other banks quickly prepare countermeasures and review the incident. Risk and compliance departments form personal networks and engage in tangible and intangible exchanges,” adding, “In regional banks, even if they are close, physical distances like Gwangju-Jeonju or Busan-Changwon mean there is little exchange between banks.”

There are also claims that distinct regional characteristics among regional banks have an impact. Busan Bank and Gyeongnam Bank, both under BNK Financial Group, maintain independent management as a ‘two-bank’ system. Due to resistance fearing a possible merger, even after about ten years since Gyeongnam Bank joined the group, it has not merged its IT systems with Busan Bank. As the holding company’s control has become ineffective, Busan Bank and Gyeongnam Bank have almost no personnel exchanges. The industry views this as another background for large-scale embezzlement incidents and delayed detection.

A local commercial bank official said, “Before interest rates rose significantly, BNK Financial Group was aggressive in the PF (project financing) business compared to other banks. From our perspective, they were active even in risky businesses,” adding, “The competition between Busan Bank and Gyeongnam Bank under the two-bank system and possibly lax risk management related to PF might have been factors.”

A local financial sector official said, “Putting aside inefficiencies from the independent operation of the two banks, since conflicts related to integration have not been resolved, the holding company’s control over Gyeongnam Bank seems weak,” adding, “The outdated IT system remains, and since the holding company’s control does not reach, internal controls inevitably weakened.”